Canada 10Y Yields Ease as Peace Hopes Cool Stagflation Fears

The Canadian 10-year government bond yield edged down to 3.4% on Friday, approaching one-month lows, following a global decline in sovereign yields as the reopening of the Strait of Hormuz temporarily eased inflation concerns. Iran’s Foreign Minister said that the strait is now fully open to all commercial vessels for the duration of the 10-day ceasefire between Israel and Lebanon. This led to a nearly 10% plunge in il prices. The de-escalation has prompted global traders to increase bets on central bank rate cuts by year-end, with markets now pricing in a higher probability of dovish pivots.

The Canadian 10-year government bond yield tumbled toward 3.4% as the threat of a catastrophic global energy shock receded following a conditional ceasefire agreement between the United States and Iran. This significant decline in expected borrowing costs accompanied a plunge in WTI crude prices after President Trump delayed infrastructure strikes for two weeks to allow for formal negotiations. The cooling of geopolitical tensions has effectively removed the immediate stagflation fears that dominated March and provided major central banks with the necessary headway to adopt more dovish policy stances. Markets remained focused on the easing of transportation and logistics costs which had previously threatened to unanchor inflation expectations. Investors are now shifting their attention to Friday's US CPI data to gauge the lasting impact of the five-week conflict on North American price pressures.

The Canadian 10-year government bond yield traded around 3.48%, remaining below July-2025 highs reached last month, as traders assessed the latest developments in the Middle East. US President Trump pledged more aggressive action against Iran but offered no concrete plans to reopen the Strait of Hormuz. Crude prices remain close to 2022 highs, fuelling inflation concerns and boosting the US dollar and Treasury yields. Last month, the Bank of Canada held its benchmark interest rate steady at 2.25%, noting it was too soon to assess the economic impact of the conflict but money markets are pricing in around 41bps of tightening this year.